Explanation:

Effective duration is the correct answer because it measures the sensitivity of a bond's price to changes in the benchmark yield curve, accounting for embedded options (like call or put features) that affect cash flows when interest rates change.

Why other options are incorrect:

1. Modified duration (Option B): Measures price sensitivity to changes in the bond's yield to maturity (YTM), assuming a parallel shift in the yield curve and no changes in expected cash flows. It doesn't account for embedded options.

2. Price value of a basis point (PVBP) (Option C): Measures the change in bond price for a 1 basis point change in yield. While related to duration, it's an absolute dollar measure rather than a percentage sensitivity measure.

Key Differences:

• Effective duration = (P- - P+) / (2 × P0 × Δy) Where P- = price when yield decreases, P+ = price when yield increases, P0 = initial price, Δy = change in yield
• Modified duration = Macaulay duration / (1 + y/k) Where y = yield to maturity, k = number of compounding periods per year
• PVBP = (Price × Modified duration) / 10,000

Since the question specifically asks about sensitivity to changes in the benchmark yield curve (which affects bonds with embedded options differently), effective duration is the most appropriate measure.